Where to buy for growth…

The ABS recently released the latest population figures for Australian cities. It gives us a good guide to what areas are hotting up, and for the scale of housing shortage across Australia.

The latest data we’ve got is only up to the end of 2012, but the overall trend is clear: Australia’s population growth continues to ramp up. The fact is, everybody loves Australia.

The Australian population increased 1.8% in the 2012 calendar year, the highest rate of population growth since 2009.

That means that the gap between demand and housing supply is widening even further.

Remember a few weeks ago that I noted that through 2000 – 2010, Australia’s population growth outpaced new housing development for the first time since WW2.

History is a great teacher and a predictor of what is likely to happen in the future.

So let's go back in time…

In the 70s and 80s, the housing stock was growing at a much faster rate than the population. Between 1976 and 1991, the housing stock grew by 41 percent, while the population grew by 23 percent.

But the balance has been shifting ever since, with the pace of supply slowing, and the pace of demand increasing, until demand finally over-took supply in the noughties. In that decade, the population grew by 15.9 percent, while the housing stock grew by 15.2 percent.

Hmmm… Interesting. Do you remember what happened in 1990? After a period of interest rate hikes that maxed out at around 18%, the property market crashed. It didn't recover until 1995-96.

Now you know why… That's why talks of a property boom and bubble are B.S.

We’re steadily shifting further and further towards housing shortage. And this of course, means rising prices.

But what the latest ABS data show us is that the gap is continuing to widen.

We know that we are building fewer and fewer houses every year. For the better part of a decade, building has been in decline. That’s what this graph shows:

What is shows is that new housing (both houses and units), is down from around 160,000 new dwellings in 2001, to around 80,000 new dwellings today.

That’s been cut in half!

But population growth continues to ramp up. 1.8% in the 2012 calendar year works out to 19.5 % through a decade.

So if population growth maintains that pace, and new housing maintains it’s current pace, rather than 15.9 : 15.2 growth ratio, we’ll be looking at a 20:10 growth ratio, or something like that.

It’s a big difference. There’s already a housing shortage in Australia, and it’s only getting worse.

(And of course, that just assumes current growth rates, which involves supply arresting it’s long run decline. It could easily be more.)

The Australian housing market is out of balance, and it’s only getting worse. And that means, and at the deepest and most fundamental level of the market, there is serious upward pressure being brought to bear on prices… over the long term.

If we break it down and see where that population growth is going, we can see that the vast majority of it continues to flow into the capital cities. About 66% of Australia’s population live in one of the eight capitals. Yet those eight capitals account for 75 percent of the population growth.

But not all cities are equal. Perth has been leading the way. I guess there’s no surprises there. Perth grew at 3.6% in 2012, and while Perth accounts for just 8.4% of the population, it’s responsible for 18% of its growth.

The other city we’re used to seeing at the top of the population growth leaderboard is Brisbane. Brisbane is less than 10% of the population but accounts for 12.1 percent of the growth.

And then poor ol’ Tasmania continues to bring up the rear. The population of Hobart managed to grow 0.3%, but Tasmania overall didn’t grow at all!

RP Data have produced some interesting maps of the capitals, showing which areas have seen the most rapid growth. I’ve included these here for your interest.

A couple of points to note, the ‘heat maps’ are based on population changes, not flows of actual numbers. That means if a suburb was small to start with, then it’s easier to post large percentage increases.

This is important to know, and often can suck the amateur into making a terrible low-growth property decision.

This is why for a lot of these maps, the hottest areas are in the far-outer suburbs. But it’s not that these places have suddenly become the most sort-after areas in the city. It’s just that they’ve probably only recently opened up – turning old farm land into housing estates, and suddenly a farmer and his wife is now 50 new families.

At the same time, a move to higher-density living in the inner-cities can be driving population growth in these areas. Take the areas surrounding the Sydney CBD. These are growing rapidly, which can only be due to the pace of apartment development in recent years.
On that basis. I would not buy in the outer-rim suburbs that are showing high-percentage growth in population moves or CBD properties.

So where DO we buy for growth?

My tip would be to soften your focus a little. Look at micro-regions, rather than just individual suburbs. Take a look at the map of Sydney. The inner-city is growing quickly, and so is the west, out around Parramatta. But there’s a bracket between the two areas posting modest growth, but where housing is likely to be broadly substitutable.

The formula for me is as follows…

I would look at a 5 – 10km radius from the CBD and find a population spike within this area. Then, I would consider the adjacent suburb, which is most likely not to have had a price-hike just yet. The 5-10km radius is good for Melbourne and Sydney. When you are considering other major cities, you need to bring it in to a 5km radius.

Here's another technique… You'll never read this in any guru's property success book (aren't you glad you read this far?)

Absorption-rate.

Ever heard of that before?

No, I didn't think so. Now, I can't take credit for this technique, I learnt it from a business-buddy of mine who is worth $60 million.

Absorption rates are used to calculate housing supply and demand. If a location has too many homes for sale, it will drive prices down. The inverse is also true. If there are not enough homes for sale, prices will increase.

To calculate the absorption rate, take the number of existing homes for sale and divide it by the number of homes sold per month. A higher number indicates a buyer's market (lower prices). A lower number indicates a seller's market (higher prices).

For example, if a location has 1,000 homes for sale and 100 homes were sold last month (1000/100 = 10), it would take 10 months to clear that inventory. Six months is considered a balanced market.

Taking into account the absorption rate, and without drilling down on the actual numbers, you can see why Sydney, Perth and Melbourne have boomed in the last 2-3 years… and why the Gold Coast is still flat as a tack.

At any rate, back to population growth.

It’s interesting to have a look and see what areas of the capitals are growing. So I’ve included them all for your interest.

Great post as usual Jon,
The absorption rate is a useful tip. I was thinking it’d also be good for the rental market – how long it would take to rent out all the rental properties on the market.
Do you, or does anyone, have any idea on what a normal rental absorption rate for Australia might be?

Hi Jon,
i am facing the future at 56 i have 64k of bad debt no assets after working all my life and failing 2 marriages when i was in the market it was profitable for me/us. Please show how someone like me can get into the market. I have been following you for about 12 months and this is my big question and if you have an answer I am listening. I identified with your story of owing 420K to the ATO and was pleased to hear you found a way out of the situation through real estate that has transformed your life.
Steve

Hi Steven, It’s definitely not a man’s world. JJ is correct. If you live in the snow and bushfire region, and would like a new starting place would you consider Cairns in Nth. Qld. Plenty of small towns just to the south that are very cheap. If you are a trades person, you will have no problem finding work. An up grade would bring a good gain in the next few years. Go on, be a devil, what have you got to lose. Might even see you up here. Cheers, Ken.

A message for Steven,
it is never too late to start investing in property. I would suggest you begin with something affordable in a cheaper area, even regional Victoria that you will be able to rent easily. Maybe a 2 bedroom unit?
whatever u do, dont procrastinate. Make a decision. Doing something is better than not doing anything at all!

Bay side suburbs of Brisbane are already built out with old houses. Very expensive to buy but ok to sell and buy better some where else. If you bought pre 1980, you would be sitting on a golden egg. Ken.

Hi Jon, I would be interested to see your reply to Steve. We are in a similar situation and need help with how to get started at this late stage in life after years of ill health and bad debt. Would love your input please.
Glenys

If I was in your shoes I would consider low or no money down deals for the next two years that will help you pay off your debt and start a property portfolio that will take care of you. I would go into joint ventures with the property owners as the money partners. Some of the strategies I would use is some sought of ‘rent to own’ arrangement with someone who has a subdivideable land that has a house that can be cosmestically renovated to raise its value. I would move into the house and do the work myself and in the mean time subdivide the block and sell it off! By the time of settlement (say 1 year), you would have increased the value of the land by subdividing and renovating the house. This can make you some serious $$$$.